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or matching basis so that expenses are matched to the revenue earned. This implies,
expenses should be shown in the profit and loss account as they have been incurred
rather than as they have been paid.

Cost Concept

According to this concept, fixed assets are recorded in books of account at their actual
cost price rather than their market price or book price. If machinery was purchased
at Rs. 1,00,000 before five years, and today it costs Rs. 1,70,000 in the market, the
depreciations and other accounting record should be maintained on the basis of Rs.
1,00,000. This actual cost is systematically reduced over its life by depreciation. Cost
cannot be disputed as invoices or other documentary evidences may be produced to
support it. This treatment is said to be objective because it is based on fact and not on
opinion. Some of the scholars have criticized the historical cost principle, even though
it is still the most widely used method.

Revenue Realization Concept

According to this principle, revenue is recognized only when a specific critical event
has occurred and the amount of revenue is measurable. This concept of revenue is
known as the realization principle. When the order is received but goods are not
supplied and customer pays for goods in advance these are not revenue. Therefore,
revenue is supposed to be earned only when the seller sells the goods to the buyer.

Going Concern Concept

A business is a going corncern if there is no intention to discontinue. It is the foreseeable
future. If it is short of working, capital and the owner is unable to put more money
into it, or to find somebody who will be prepared to lend it money, it may be unable
to pay its creditors and forced to close.

Unless stated to the contrary, it is assumed that the accounts of a business are prepared
on going concern basis. If a business is not going concern, the assets should be valued
in the balance sheet at the amounts they could be expected to fetch in an enforced
sale, which could be much less than their real worth. Balance sheet should always
show a realistic situation, bearing in mind the weakness of the business.
Accounting Period Concept

According to this concept, to know the result of business transactions, the life of
business is divided into appropriate periodical intervals which is known as accounting
periods. Every organization follows this concept because the life of business is
assumed to be indefinite and under this circumstances, business can not wait for
such a long period for the determination of profit and loss and financial position of
the business. Normally accounting period of one year is determined in which the
financial statements are prepared.

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